The European Union created the Emissions Trading System (ETS) to spur decarbonisation. Using the power of policy, it established rules for emissions to be capped and traded, and then set market forces free. The price of EUAs rose from under €10/tCO₂ to peaks near €100/tCO₂ within a decade, creating a powerful economic incentive for energy producers to transition to renewables and for industrial consumers to reduce their emissions.
Guarantees of Origin have a different history. They were established as a voluntary instrument for tracking clean electricity and allowing buyers to claim ownership of its green attributes. The benefits were mainly reputational, while the market signal was intended to stimulate renewable energy growth.
These are perhaps the prime examples of compliance and voluntary environmental markets in Europe. One is driven by regulation; the other, by the value of making the right choices.
Often, the two categories are pitted against each other in an attempt to determine which is more effective in driving meaningful action. But are compliance and voluntary mechanisms opposites, or are they two sides of the same coin?
The line between the regulatory and the voluntary is often blurred, not least by the organisations that participate in them. Consider a large industrial company in the chemical sector. Covered by the ETS, the company must surrender each year a number of EUAs equivalent to its direct emissions, and it will likely enter the market to find the allowances it needs.
The company, however, can also use voluntary instruments, such as biomethane Guarantees of Origin (GOs) and Proofs of Sustainability (PoS), to reduce its ETS obligations. Voluntarily purchased certificates are thus put to work in the mandatory sphere.
Renewable electricity makes the boundary between the mandatory and the voluntary even thinner. We tend to think that regulations are mostly targeted at the supply side, while corporate procurement is voluntary. After all, fossil electricity production is covered by the ETS, while electricity suppliers are obligated to disclose the electricity mix they sell to consumers.
But legislation like the CSRD, which has made GOs the market-based instrument for proving renewable electricity consumption, has once again given voluntary instruments regulatory relevance. Yes, buying GOs is still optional, but reporting—with the risk that entails—is not. Other policies, like the Carbon Border Adjustment Mechanism (CBAM), could further incentivise the voluntary procurement of renewable electricity and biomethane beyond European borders.
In the US, where Renewable Energy Certificates (RECs) start as compliance instruments and then spill over into the voluntary market, the overlap between the two is even more explicit. All in all, for many market participants, the division seems artificial—especially when we consider how each complements the weaknesses of the other.
Those who defend regulatory mechanisms point to their definitive nature. Once something is written into law, covered entities must either comply or face legal and economic consequences. Additionally, the EU single market makes regulation applicable across borders.
On the other hand, supporters of voluntary systems highlight the impossibility of legislation covering all organisations. Compliance mechanisms have a limited scope, while voluntary instruments allow companies of all sizes and sectors to participate.
Both frameworks have weak points. Voluntary action can be diluted by changes to the frameworks that govern it, as evidenced by the ongoing revision of the Greenhouse Gas Protocol. Businesses across the board have opposed the revision, arguing that the new requirements are not feasible for most companies. Many may downscale their commitments or abandon them entirely.
Voluntary markets are also hindered by structural oversupply. The GO market, the most developed EAC market in the world, still struggles with an excess of available certificates. In contrast, in mandatory markets—supporters would say—compliance provides a demand floor, creating real scarcity and price tension, which ensures the long-term viability of the system.
But is the political will that underpins regulations guaranteed? In recent years, the CSRD has been diluted to a fraction of its original scope. The ETS, where allowance prices have plateaued, faces significant backlash from some Member States. The US is currently leading a rejection of all climate measures, while global warming appears to have slipped down the priority list, even among progressive governments.
How, then, should we decide which tool is more effective? If both have downsides, do we have to choose one, or are we asking the wrong question altogether?
Voluntary and mandatory environmental markets are not isolated; they are part of a self-reinforcing system. This interplay between markets and regulations is what UN Climate Change High-Level Champion Nigel Topping calls an “ambition loop.”
Politicians have the power to create binding obligations, but they must also think about risk, public support, and the likelihood of pushback, which becomes less likely when policies build on strong voluntary momentum. Voluntary action, in turn, incentivises legislators to develop more ambitious regulations that continue moving the needle in the right direction.
Consider the development of the policies and frameworks discussed here. The Guarantees of Origin system was established in 2001. Shortly after, the ETS emerged. While the GO system did not directly shape the EU ETS, both arose from the same policy push—one to track (mostly voluntary) renewable electricity use, the other to price carbon. Together, they became complementary tools in Europe’s climate framework.
Strong support for the GO system has since influenced policies like the CSRD to include it in their frameworks. GOs are also becoming an increasingly prominent feature in each successive revision of the Renewable Energy Directive.
In some countries, the impact of voluntary mechanisms on policy is even more visible. In Norway, where GOs were historically unpopular among parts of industry and government, strong voluntary procurement—and its financial benefits—has led to their inclusion in a tax scheme that generates significant income for the Norwegian government. The importance of the tracking system and Norway’s continued participation in it are now beyond question.
Environmental commodities are at a crossroads. Political turbulence is global, and voluntary commitments are being tested. But the markets remain. To stay relevant, they must continue to stimulate and reinforce each other. After all, we are pursuing the same goal. The more tools we have at our disposal, the greater our chances of achieving it.